You are right to worry about budget day

We’re about to feel the full impact of the collapse in the public finances, writes
FIONA REDDAN

IT’S TIME to hold on tight for a white-knuckle ride as we’re about to feel the full impact of the collapse in public finances in next week’s budget.

After years of give-away exercises, when we were all used to starting the New Year with a little bit more in the pay-check, the tide has now turned and the only direction disposable income will move is downwards.

Minister for Finance Brian Lenihan has asserted that the focus of his budget will be on cutting public spending rather than raising taxation, with only one new tax likely to be introduced – carbon tax.

Nonetheless, consumers will still feel the pinch with reductions in social welfare payments such as child benefit, the introduction of the aforementioned carbon tax, and the possibility that more people will have to pay tax at the higher rate.

Moreover, the Minister may also look to boost tax revenues by restricting reliefs on taxes.

“It is unlikely that he will increase the rate of tax, but it is very likely he will increase revenue by adopting a number of the recommendations to abolish or restrict various reliefs in the tax system,” says Jackie Masterson, taxation partner with Russell Brennan Keane.

This means there is a possibility that relief will no longer be granted at the higher rate of tax for pension contributions, while the ceiling for pay-related social insurance (PRSI) may also be removed.

So, if you’re concerned about budget day, what should you look out for in the Minister’s speech next Wednesday?

Income tax

While the introduction of a third rate of tax, of the order of about 48 per cent, has been mooted, the Minister has since indicated that there will be no increase in income tax, so it is now seen as unlikely.

“I think you wouldn’t expect it,” says John Bradley, tax partner with KPMG, although he adds that the Revenue Commissioners and the Department of Finance have done their homework on the issue.

A more likely possibility is that the employee PRSI ceiling will be abolished, as already signalled by the Government.

At present, PRSI at 4 per cent only applies to the first €75,000 earned – this is a ceiling that was raised from €52,000 in the last budget.

If the ceiling is abolished, however, income earned over that level will now incur PRSI. According to Bradley, this would cost someone earning €100,000 an extra €1,000 in tax a year.

Higher income earners may also be hit by the imposition of another levy on income earned over €150,000, of the order of about 1 per cent or 2 per cent, although Bradley notes that the abolition of the PRSI ceiling would have the same impact on revenues.

Those on lower incomes also may not be left unscathed as Bradley suggests that there may be a reduction in either the PAYE or personal tax credit, given that those earning up to about €18-€20,000 currently don’t pay any tax.

Another possibility is that the band at which you pay tax at 41 per cent will be reduced, thereby meaning that more people will pay tax at the higher rate.

As Padraig Cronin, partner and head of tax and legal services at Deloitte, points out, however, any reductions in the take-home pay of those on lower incomes will have to be matched by reductions in social welfare benefits or there won’t be an incentive to work for some.

Likely outcome: abolition of the PRSI ceiling.

Child benefit

With child benefit set to cost the Government €2.5 billion this year alone, it is now looking almost certain that it will be reduced in the budget.

Bradley says there are three ways of cutting back on the benefit:

1) means testing the payment;

2) taxing it;

3) reducing it.

While the Commission on Taxation in its report suggested that the benefit should be taxed, with a tax credit to offset the increase in tax for low income earners, this is now seen as unlikely. Although Bradley maintains that it “shouldn’t be rocket science” to bring the benefit into the tax net, it is now considered too difficult a process to introduce, and so the more likely outcome is that the benefit will be reduced.

Minister for Social and Family Affairs Mary Hanafin previously indicated that three different levels of child benefit payments may be introduced. The rate is currently €166 for the first child, rising to €193 for an eighth child, but this may be cut by 20 per cent to €132, with a top-up payment available for social welfare recipients and those on low incomes.

The third rate would apply to high earners, or those earning over €150,000, according to Bradley, and he says this group may not get anything or “very little”.

However, as Cronin points out, the difficulty in identifying the higher earners is that the social welfare and Revenue IT systems “aren’t talking to each other as efficiently as they could”, which means it may be difficult to do from an administrative perspective.

Likely outcome: 20 per cent cut in child benefit

Pensions

As signalled in the Commission on Taxation report, and reiterated in the Government’s rewritten strategy document, a decrease in the level of pension tax relief available to middle and higher earners is on the table. The Government has affirmed that it wants to introduce a single rate of just 33 per cent, meaning that middle and higher income earners will no longer benefit from relief at the higher rate of tax.

The pensions industry has warned that such a move would severely affect their business, given that higher earners would be disincentivised from saving for a pension as they would have to pay more in tax during their retirement than they would get in relief while saving. However, a recent report from the Economic and Social Research Institute (ESRI) said that a single rate of tax relief on Irish pension contributions would save public money and would be fairer.

Nevertheless, Bradley does not expect this measure to be introduced any time soon. “I would be amazed if they brought it in without proper consultation with industry,” he maintains, while Cronin adds: “Structural reform should never be done lightly, and never in a rush.”

Whether or not the Government goes down this road in this budget remains to be seen, but what is considered very likely is that the amount an individual can take as a tax free lump sum at retirement will be capped, with the balance subject to tax at the standard rate of income tax.

While the commission’s report recommended that the cap be set at €200,000, Bradley says that it has been suggested that it could actually be as low as €125,000. Given that you can elect to get either 25 per cent of the value of your pension fund or 1.5 times your final salary tax free at retirement, such a move would impact not just on higher earners but those with a pension fund of more than €500,000 or a final salary of over €83,000.

Another likely change is that the use of an Approved Retirement Fund (ARF) will be extended to members of defined contribution occupational pension schemes.

In last year’s budget the levels of earnings which are eligible for pension tax relief were reduced from €275,239 to €150,000 and, given that the commission has recommended that this be “accompanied by a corresponding movement in the level of the standard fund threshold”, this change may also be introduced next week.

The standard fund threshold is currently set at €5.4 million, so if the proposal is accepted then a corresponding movement would see it reduced by 45 per cent, down to about €3 million. At this level, such a move should not impact the majority of people’s pension funds.

Likely outcome: The introduction of a cap on the tax free lump sum at retirement; the extension of use of ARF

Social welfare payments

With the focus in the budget to be on cuts in public spending, it’s a sure thing that this will mean decreases in social welfare payments.

One apparent target for cuts is the Jobseeker’s allowance, with expectations that this will be cut by about 20 per cent down to about €160 a week for those in their early 20s unless they enrol in a training scheme.

Cronin says he would be “surprised” if this measure isn’t introduced as “it seems to make a lot of sense”.

Another area where cuts are expected is the rent supplement scheme, which the unemployed can avail of to pay for rented accommodation. “On the basis that rents have come down, this supplement should also come down accordingly,” says Bradley.

Given the outcry which succeeded last year’s move to abolish automatic entitlement to medical cards for the over-70s, it isn’t seen as likely that there will be any similar measures this year.

“The last thing he’ll be touching is anything to do with the elderly or infirm,” declares Cronin.

Likely outcome: A reduction in Jobseekers allowance for the young unemployed; reduction in rent supplement scheme

Property

While a property tax is unlikely to be introduced this year, the Government may make the first step towards such an arrangement through a property register.

The imposition of such a tax would have meant that the owners of an average home would have had to pay about €1,000 a year, but Frank Daly, chairman of the Commission on Taxation, recently said that Ireland “can go on for a couple of years” without a property tax being introduced.

Elsewhere in property, given the lack of activity in the property market, a reduction in stamp duty is seen as possible, while Bradley also raises the possibility that the €200 charge on second homes, which was introduced this year, might be increased.

Likely outcome: Tax will be put on the long finger, but stamp duty might be decreased

Car scrappage

The beleaguered motor industry has been lobbying the Government to introduce a “cash for clunkers” scheme which would enable motorists with cars older than 10 years to get cash back on the purchase of a new vehicle.

Under proposals outlined by the Society of the Irish Motor Industry (SIMI), buyers who scrap a 10-year-old vehicle could get a €2,000 vehicle registration tax refund if they buy a new car in the top three environmentally- friendly categories. The scheme would commence next January, and run for 12 months.

Bradley says that, given such a scheme would be self-financing, there is a good chance that it will be introduced.

Likely outcome: Incentive for new car buyers

Carbon tax

It may have been some time in coming, but the much-discussed carbon tax looks set to be introduced next week, with the Government expected to raise between €400 and €500 million from this source next year.

While you may think the tax will only affect big businesses, it will actually impact us all. According to Masterson, it will affect most fuel products such as petrol, diesel, coal, peat products, LPG and natural gas. It is seen as likely that the cost of both petrol and diesel will increase by 5 cent a litre, while a tonne of coal might incur a cost of €60.

Likely outcome: Fuel price rise of five cent a litre

Water charges

Another tax which was discussed in both the commission’s report and the Renewed Programme for Government was a water charge. While households would be granted a free allowance, a proportional tax would be imposed on any household that uses more than the free amount. However, given that metering to monitor water usage would be expensive to introduce, Minister for the Environment John Gormley has said he does not envisage a water tax being introduced in 2010.

Likely outcome: unlikely to be introduced this year.

What else to expect next Wednesday

Residency rules

According to Bradley, the Government may look to tighten residency rules to bring more wealthy individuals into the tax net. This could be done in a number of ways, such as reducing the number of days needed to be spent in the State, or combining this requirement with property ownership, to make it harder to be non-resident.

While he concedes that this might not bring in a lot of money, it might be done as a political manoeuvre.

Mortgage interest relief

The Commission on Taxation report recommended that mortgage interest relief be discontinued for everyone except first-time buyers and, according to Cronin, this “could be something that the Minister will look at”.

Excise duties

The jury is out on whether excise duties on the “old reliables”, cigarettes and alcohol, will be increased. Masterson suggests that the Minister will look to raise some immediate taxation by raising duties, but Bradley thinks not.

If you put booze up you’re only going to encourage more cross-Border trade,” he says.

VAT

While Brian Lenihan may have acknowledged that last year’s decision to increase VAT to 21.5 per cent was a mistake, it is seen as unlikely that it will be decreased by much this year. “I would be amazed if they decrease it by anything significant,” notes Bradley.

Another alternative to reducing the rate is to eliminate the lower 13.5 per cent rate, and replace both with a 15 per cent rate. Cronin, however, deems such a move as “too risky”.

Redundancy payments

At present employees can avail of fairly generous tax relief on redundancy payments as there is no limit, notes Bradley. However, he adds that, as outlined in the commission’s report, a cap of €200,000 may be introduced.

Remittance

Cronin thinks it will be important for the Government to send out a message that “Ireland is open for business”, and as such thinks there may be some enhancements to the remittance basis of taxation for foreign professionals working in Ireland.